New paradigm needed, II

Following our post yesterday on how we need a new paradigm for business, it was interesting to read George Magnus (“the man who predicted the sub-prime crisis”) writing in the FT today saying almost the same thing”

“Put simply, the economic model that drove the long boom from the 1980s to 2008, has broken down.”

He uses the word model. We used the word paradigm.

He writes about the scale of the bust, “system[ic] malfunctions”, and a “once-in-a-generation crisis of capitalism.”

Painting it clearly, “our economic model and policy settings cannot produce sustainable growth, adequate income formation or employment creation.” The growth drivers we previously relied on were the housing market, cheap credit and financial services. All three bubbles have burst.

Or putting it more simply, we borrowed against the future, and that future is now here.

One statement he makes is particularly interesting:

“The capacity to produce and sell goods and services has outstripped that of consumers to borrow and spend.” [And, we might add, their ability to earn and spend.] “It is truly a crisis of aggregate demand.”

This statement says that the solution to the economic crisis is to increase the ability “of consumers to borrow and spend.” But as we know, the austerity measures being implemented around the world are having the exact opposite effect. Their greatest impact is on the poorest members of society.

The solutions being implemented are having the exact opposite of what is needed, exacerbating the situation still further.

Solutions?

So, if the old model is broken, what do we need to do?

Magnus says that governments “have to re-engage with economic growth.” He lists the large numbers of things that are being done, but says he does not see the political will to engage yet with the key factors that are needed: job creation, reduction of household debt, amongst others. [It is nice to see as well that he agrees with our post yesterday that the proposed ‘twist’ QE in the US is unlikely to affect demand.]

But even the factors he suggests do not strike us as a new model — they just seem ways to revitalise the old model.

New Paradigm

George Magnus probably does not think of it this way, but if the solution is to increase the ability of consumers to borrow and spend, then that implies having a world that is more equal; with a smaller gap between rich and poor. It implies increasing the ability of consumers to earn and spend, which in turn means giving them access to things like better education, infrastructure and healthcare. A new paradigm indeed.

The impact of this thinking has already been seen in Bangladesh, for example, where Grameen bank has developed products and services for the very poor. The result has been to bring those people into the economy, so that everybody gains. Other companies (often labelled ‘social enterprises’) have done the same and the result is win-win.

We extend the paradigm a step further. We start from a worldview that says “It is ok for me to be very rich while others are very poor” has resulted in an economy that stagnates (crashes!) because the poor do not have sufficient credit to maintain consumption. Extending that one step further gives us “It is ok for me to become very rich by making use of (/destroying) natural resources.” The effect of this thinking has been to place every ecosystem on the planet under stress, and to bring our fish stocks and the oceans (for example) very close to the point of collapse.

This is the ‘trickle down’ view of economics: Focus on making the rich richer and the wealth will trickle down. A 30-year experiment has shown us where this leads.

An alternative approach would follow the thinking od the Masai people: “Take care of the animals, and then the animals will take care of the people.”

In business terms this is called “Servant leadership” — the role of the leader is to serve the people.

Militarily this approximates to: “The army marches on its stomach” — if I look after my soldiers then they will look after me.

Rather than trickle-down economics, what Magnus us telling us we need is ‘trickle-up’ economics:

If we focus on those who are least fortunate in society, and increase their standards of living, then the standard of living of everyone will rise.

This is a subtly different approach to ‘trickle-down’ economics. But we suggest it is a more sustainable paradigm.

As a next, and final step, it is equivalent to a rewording of the definition of sustainable development.

In 1987 the Brundtland Commission defined sustainability by defining sustainable development as:

“Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

We say this definition is flawed.

Truly sustainable development is:

“Development that enhances the ability of future generations to meet their needs.”

If we all focused on making it easier for our children and their children to meet their own needs (as some individuals throughout history have done) then the world would soon become an abundant place.